Instrument Choice: Voluntary Programs and Economic Instruments

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Submitted by Brian Gale on Fri, 09/24/2010 - 10:25

When bilateral, voluntary programs are combined with one or more of the three primary economic instruments – taxes, subsidies, tradable permits.

One example of a bilateral, mixed-policy initiative is the Danish agreement scheme on energy efficiency in industry, passed by the Dutch parliament in 1995 with the aim of reducing emissions of CO2 and SO2 in that country. The system levies an emissions tax on energy-intensive firms, but offers incentives in the form of tax breaks and R&D subsidies to those firms that agree to reduce emissions (Johannsen, 2002).

When including voluntary agreements in a mixed-policy approach, policymakers are sometimes confronted with concerns that their collaboration with emitters will set a precedent that will privilege those interests in the crafting of environmental policy in the future. At the same time, it is also possible for policy to so strongly incentivize voluntary participation – through preferential tax rates, subsidies, or permit quotas – that an agreement is essentially involuntary.

Unilateral voluntary programs, in which firms take abatement measures on their own initiative, have arisen more recently. Studies have shown that in some cases, firms facing an emissions tax in the future will voluntarily take abatement measures in the present, assuming that this will influence the rate of the impending tax in their favor (Klaus, 2001; Lyon et al, 2003).

The literature in this section includes case studies of policy-mixing outcomes, as well cost-benefit modeling of the mixing of voluntary programs and economic instruments.